May 2, 2008

Whether you think love or money makes the world go round, you'll probably agree that the modern world would grind to a halt without another ingredient: fuel.

That fact — together with some unpleasant gas prices at the pump — may be why so many questions about oil, gas and other energy sources have shown up recently in the submission line for "Ask AP," a weekly Q&A column where AP journalists respond to readers' questions about the news.

This special edition of Ask AP focuses exclusively on questions about energy, with answers provided by two of AP's experts on the topic: John Wilen, an AP energy and transportation writer in New York, and John Porretto, a reporter at AP's Houston bureau who covers the oil industry.

If you have your own news-related question that you'd like to see answered by an AP reporter or editor, send it to newsquestions@ap.org, with "Ask AP" in the subject line. And please include your full name and hometown so they can be published with your question.

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I have heard that oil companies negotiate contracts to buy oil for a 30-year period at a certain price. Supposedly, the price Exxon is paying now on one particular contract is $18 per barrel — as it has been for the last 20 years and will be for the next 10 years.

Whether or not that is exactly true, I've got to wonder why we see DAILY price changes at our local gas stations.

Tina Konczol

Walker, La.

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Oil companies, including Exxon, do negotiate contracts with other producers to buy oil, but prices aren't fixed at $18 a barrel or any other price — they're dictated by the market and can change daily. The companies also often buy additional oil on the spot energy market when they need more oil than they're entitled to in these contracts.

Marathon Oil Corp., for example, refines about 1 million barrels of oil a day but produces only about 200,000 barrels a day. So the company must buy hundreds of thousands of barrels daily from other producers and the spot market to satisfy its refining needs.

Gas stations, meanwhile, change prices daily to ensure they're not charging more, or less, than what the market will bear. But they also change prices as they anticipate paying more, or less, for their next gasoline shipment. Stations have to fork over thousands of dollars to wholesale gasoline suppliers before they ever see a cent in return from their retail customers.

John Wilen

AP Energy and Transportation Writer, New York

and

John Porretto

AP Business Writer, Houston

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How is it that gas stations can charge fractions of a cent for their product (i.e. the nine-tenths of a cent we see tacked onto each gallon)? Isn't it illegal to price goods or services such that they cannot be paid for, in full, in cash?

Aaron Merriman

Columbia, Mo.

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Pricing gasoline in tenths of a cent is a vestige of a bygone era when a cent had considerably more value. Discounting the price of gas by one-tenth of a cent, in those days, meant something, said Tom Kloza, chief oil analyst at the Oil Price Information Service.

Jeff Lenard, spokesman for the National Association of Convenience Stores, says pricing in tenths of a cent is legal, noting that "mill" currency, or tenths of cents, was authorized by Congress in 1786, though it was never issued. Many taxes are expressed in tenths of a cent; for instance, the federal gas tax is 18.4 cents.

One gas station owner who recently tried to do away with nine-tenths of a cent pricing was criticized ... for raising his prices by one-tenth of a cent, Lenard said.

John Wilen

AP Energy and Transportation Writer, New York

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The past couple of weeks I have seen and heard reports that because of crops being used for biofuel, the cost of food has risen significantly. I heard one report that 20 percent of the corn being grown in the United States has been used to produce ethanol.

Aren't there other sources of biofuel that wouldn't cause this problem? I've seen a report that algae, for example, requires far less acreage than corn to produce equivalent amounts of fuel.

There are numerous potential alternatives, including algae, "a very promising source for fuel," said Chris Dragisic, an analyst at the environmental organization Conservation International. But the use of algae and other alternatives to make biofuels is not yet commercially viable.

Matt Hartwig, a spokesman for the Renewable Fuels Association, says the ethanol industry is exploring many other possible ethanol feedstocks, including wood chips, switchgrass, citrus waste and garbage.